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09/29/2013

Is it realistic to think that federal spending can be cut substantially in either the short or the long run? Posner

The answer, I think, is no, provided the focus is limited to the short run—the next few years. For it’s impossible to predict federal spending in the more distant future; there are too many imponderables. Many predictions of federal spending are published, by federal agencies and financial analysts, some for as far out as 2050, but I don’t think they have any value, given the volatility of American society, foreign uncertainties, and the rate of technological advance.

Total spending, at all levels of American government, is today about 40 percent of the Gross Domestic Product. The percentage has grown pretty steadily since 1900, when it was less than 10 percent, apart from big spikes in World War I and II. It was 30 percent in 1960, 35 percent in the 1980s, somewhat lower in the late 1990s—down as low as 33 percent in 2000—and since then it has been up. Federal spending has followed a similar pattern, though of course at a lower level because it is only part of total government spending. Federal spending was only about 3 percent of GDP in 1900 and indeed was little changed from that low figure as late as 1928, but it rose rapidly to about 17 percent in 1960, reaching the low 20s in the 1980s, then dipping to about 18 percent in 2000, and now about 20 percent. When one looks at a chart of such growth, over such a long span of time with so little interruption (that is, negative growth), the upward trend looks inexorable.

Much of the growth was powered by the expansion of federal domestic programs that began in the 1930s, and of military expenditures that began shortly before we entered World War II. But a significant factor in the growth of federal spending since the 1960s has been the growth of entitlements spending—spending for which Congress doesn’t appropriate money, as distinct from discretionary spending, which requires annual appropriations. The principal entitlement programs are Medicare, Medicaid, and Social Security, and together they were 4 percent of GDP in 1971 and 10 percent last year.

If entitlements spending were not expected to grow faster than GDP, I don’t think there would or should be a serious concern with the size of federal spending relative to GDP. Of course there is lots of waste in federal spending, but there is lots of waste in corporate and consumer spending as well, and probably more in state and local government spending. Much that the federal government does, including expenditures on national defense and on national security more broadly, on medical and other scientific research, on law enforcement and adjudication, on essential regulation, on national parks, on tax collection, on foreign aid, on disaster relief, and on education is essential. The caliber of federal employees is generally high, with job security and the honor and interest of public service offsetting, for many able people, the limited financial returns to such employment. In principle most government services could be provided more economically, but given political pressures and the ineradicable characteristics of large organizations the possibilities for reform are limited. Mindless, blunderbuss cuts of the sort administered by the current sequester are inefficient, and unlikely to produce a net increase in social wealth or welfare.

Of course there is a large federal deficit, but it is quite manageable with modest increases in income tax rates coupled with broader coverage obtained by reining in some deductions and exclusions. The experience of the George W. Bush Presidency is that reducing federal income tax rates from the level that prevailed in the 1990s does not promote economic growth, though it does increase economic inequality.

The growth in entitlements is a legitimate concern. Increased longevity increases the government’s costs of Social Security and Medicare, and increased inequality of income increases the costs of Medicaid, costs shared between the federal government and state governments. But the focus of conservatives who want to reduce federal spending is not on Social Security and Medicare, which are sacred crows protected by the voting power of the elderly, or even on Medicaid (though conservatives are hostile to it, just as they are to Food Stamps and other measures of what used to be called poor relief), but rather on discretionary spending. Regarding any increase in taxation as anathema, conservatives want to shrink the federal government by drastically reducing federal spending, even if that means underfunding research, national defense, the air-control system, flood control, law enforcement, and other normal government expenditures. That is not a promising approach.

Comments

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Judge Posner is probably right that long-range spending forecasts (or, for that matter, any forecasts) are largely exercises in futility. Still, the basic problem has been clear enough for some time. As every Congressional Budget Office prognostication has confirmed, we have promised way, way more to seniors than we can possibly deliver.

If one believes in "government by reflection and choice," as one of the Federalist authors put it, there may still be time to do something about this. I don't. We will go broke. Death, as they say, is nature's way of telling you to slow down.

Posner seems to suggest two countervailing pressures: (1) concentration of wealth and income, and (2) expansion of the social safety net which helps prevent a slide into poverty, or for those already poor, a slide into destitution.

One can easily see political instability arising from an extreme concentration of societal resources, and Posner has hinted at such in earlier posts. True, inequality is advanced by a parasitic financial sector, monopolistic practices, rentiers, etc., but also by structural forces (globalization, technological change) that hollow out the middle and working classes. What happens to our democracy when all that sustains the bulk of the population are insecure low wage jobs and governmental support? At a minimum, the bonds that unite us grow weaker (already happening) and our politics grows ever more brutal (ditto). Can a new equilibrium, a new social contract, one with the promise of long-term stability, develop from this?

When it comes to Budgetary Analysis, to achieve a Budgetary equilibrium, i.e. " a balanced budget", the mathematical equilibrium occurs when "Cash inflow equals Cash outflow". Now given the Fed. Budget, the two variables in the equation are multivariable in nature and I will allow you work out how these variables work together and against each other while trying to achieve a "balance" for yourself.

But, taking an "AXE" to both sides of the equation is "ignorant" at best. Especially when we are trying to achieve a financially stable Liberal Democracy...

"conservatives want to shrink the federal government by drastically reducing federal spending, even if that means underfunding research, [...], law enforcement, and other normal government expenditures."

This overlooks the sentiment notably expressed by scientist, Terrence Kealey: government funding crowds out non-government funding and participation.

On the surface, governments are elected by a vote of the people, and the people are engaged to society through their elected officials. In reality, this is a very crude mechanism. Individual votes mean nothing and mere mortal people have little meaningful engagement with the aspects of society that are dominated by government. Right wing types feel that less government control translates to more meaningful non-government participation.

The crux of our economic woes lay in the fact that over the last several decades we have created entitlement societies on the back of the industrial revolution, technological advantages, capital accumulated from the colonial era, and the domination of global finances. They were built on the assumption that those advantages would continue in both Europe and US, and that ever greater prosperity and entitlements would be sustained through debt financed consumption growth.

In that eerie fantasy world, debt fueled consumption was to be the catalyst to bring about ever more growth. Now reality has begun to come into focus and it is becoming apparent that this is unsustainable. The entitlements and promises that have piled up have become overwhelming and even if unpopular we must face this fact. The remainder of this post can be viewed below,